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Externalities Essay

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Below is an essay on "Externalities" from Anti Essays, your source for research papers, essays, and term paper examples.

Externalities: Implications for allocative efficiency and suggested solutions.

Introduction

The prevalence of externalities in consumption and production of goods and services generates a number of discussion points indicating weaknesses in the general rules relating to allocative efficiency in the market economic system. After defining and illustrating externalities this essay will discuss the implications of externalities in relation to the general rules of allocative efficiency and then critically evaluate the various methods suggested for dealing with the problems of externalities .

What is an externality?

When discussing externalities there are a number of useful definitions and descriptions of what an externality is . In basic terms an externality "is a cost or benefit arising from an economic transaction that falls on a third party and that is not taken into account by those who undertake the transaction."1 In a market economy this generally means that an externality occurs where there is "a direct effect of the actions of one person or firm on the welfare of another person or firm in a way which is not transmitted by market prices. " 2 This externality can arise from the "the effects that consumption of an item by one consumer may have on the welfare of others" 3 or from "the effects that the production of one product may have on the production possibilities of others." 4.
Externalities may take two forms. Firstly there are negative externalities. A negative externality occurs where consumption or production of a good generates a cost borne by someone outside of the production or consumption of that good. A negative externality in consumption could for example be the exhaust fumes produced by the driving of cars or the damage done to sand dunes by tourists driving 4WD vehicles in sensitive areas. The most obvious example of a negative externality in production is the pollution caused by many industries.
Positive externalities occur when a...

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Externalities. Anti Essays. Retrieved December 13, 2018, from the World Wide Web: http://parimatch-stavka7.com/free-essays/Externalities-309902.html


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